Why the college bubble won’t pop

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2022-06-23 20:00:18

Although taken for granted by millions of Americans, the choice to obtain a college degree mystifies economists. Teenagers making the first significant financial decision of their lives are paraded through prospective student tours—essentially timeshare presentations for minors—and finally make an arbitrary pick where they will spend around a quarter-million dollars of borrowed or parental money. For some, the degree results in open doors and respectable careers. For others, it’s a scam that wastes their time and money.

To say something is a scam implies that the buyer derives no benefit. However, the data still shows that college grads earn more than non-grads, and have a much lower unemployment rate, and that this wage premium holds even in spite of inflation and student loan debt. And it holds for virtually all majors and institutions (although it’s highest for STEM degrees and top schools). So it’s not mystifying or irrational that college continues to be popular given that it still yields definite benefits. Perhaps college could be a scam if someone fails to graduate because they derive none of the wage benefits, but the debt of having attended. Also, the $250k figure he cites is wrong, being much closer to $30k/student. For some reason, perhaps for dramatization, the media and pundits keep citing these 6-figure sums when the most basic, cursory research shows this to be a huge overestimation.

But I agree that the bubble has resisted all predictions over the past 12 or so years of its demise, as I correctly predicted many years ago. I also predicted that Covid and remote/online learning would not put a dent in the wage premium either. My guess is, this is due to a combination of the loans being federally backed, but also because college is still mutually beneficial for both parties: employers get better employees, and grads make more money even if tuition keeps going up. For the bubble to burst would require that one of these fail. Somehow employers would have to realize that they are vastly overpaying. But given how obsessed companies are with profits, makes this even less likely. Labor is a major cost, and it’s not like employers want to spend more on employees than is absolutely necessary. When a company like Google pays $300k/year for an engineer, it’s because if they didn’t the engineer would go elsewhere, not because Google is feeling really generous. When a company is struggling or if there is possible trouble on the horizon, the first step is always layoffs, so keeping labor costs low is a top priority. It’s not going to come from defaults, like the 2008 subprime crisis.

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